One day you’re celebrating the first day at a new job. The next thing you know, toasts are being raised at your retirement party. With each passing year, the hands on the retirement clock spin faster. That’s why it’s wise to establish milestones — at 10 years, five years and one year out — to fine-tune investment strategies, buffer against market volatility and help ensure that life post-work is more relaxing than taxing.
The majority of retired Boomers feel confident they’ll have enough money to last a lifetime, according to the recent Ameriprise Pay Yourself in Retirement study.¹ That may be because 85% indicated they have a plan in place to pay for both essential and discretionary expenses. In stark contrast, 48% of those still working haven’t begun the process of planning for retirement, according to the study.
We asked Marcy Keckler, Vice President of Financial Advice Strategy at Ameriprise Financial, to outline key financial moves for the years leading up to retirement.
A decade from retirement, you’re close enough to begin envisioning your post-work life, yet flexible enough financially to reallocate your assets in ways that will optimize your retirement income. “One of the problems we see is people putting all their money into the tax-deferred bucket — such as a 401(k) plan — and not taking advantage of other strategies that help spread out your tax obligations, such as a Roth IRA or Roth 401(k),” Keckler says. “If you limit yourself to a tax-deferred plan, when it’s time to take distributions, generally it’s all fully taxed.” Roth distributions are tax free in retirement, if conditions are met.
“This is typically when people’s behavior changes,” Keckler says. “All of a sudden, retirement is no longer a goal that’s out past the horizon; it’s right in front of you. Many people aggressively pay down debt they may have and save all they can, like squirrels putting away nuts in the fall.” According to Keckler, 3–5 years away from retirement is the ideal time to implement a cash-flow strategy, such as investing in items with specific maturity dates.
“Retirement is a moving target, but if you’ve got your assets properly diversified and tax-diversified, it can unfold smoothly,” Keckler says.
“It’s important to get your first several years of retirement covered, so even if the market goes down, you won’t have to draw on your long-term assets.”
— Marcy Keckler, Vice President of Financial Advice Strategy, Ameriprise Financial
In the 12-month countdown to retirement, it’s a good idea to lessen the mystery of what your lifestyle will soon be like and gain clarity on your post-work spending. To do this, Keckler recommends running two sets of books — either conceptually or perhaps physically with separate credit cards and checking accounts — to quantify two types of expenses. The first is essential needs that will continue in retirement. The second is lifestyle purchases that are typically one-offs. “After doing that for a year, you should have a good idea of how much income you need to take care of the essentials while having some extra for lifestyle expenses that are going to pop up,” she says.
Finally, Keckler highly recommends meeting with your company’s human resources representative and asking specific questions. If you have any type of pension, deferred compensation arrangement or stock options, explore the available scenarios for drawing income. This is also a good time to look into 401(k) distribution choices and what, if any, benefits you can take with upon retiring, including health insurance. It is important to consider if an IRA rollover will offer you more investment choice and distribution flexibility than your 401(k). If you’re not yet 65 and Medicare-eligible, it’s a good idea to plan ahead for any medical insurance coverage gap.
The Ameriprise Pay Yourself in Retirement study showed that those who have worked with a financial advisor are more confident and more comfortable with their retirement income. “Retirement isn’t necessarily a do-it-yourself project,” Keckler concludes. “Most people are going to retire once, but an experienced advisor has helped hundreds of people plan for their retirement.
Here are additional financial planning moves to discuss with your advisor at key milestones during your countdown to retirement.
10 years out:
- Make a concerted effort to ramp up savings. Your window for “socking away” cash is beginning to narrow.
- If you have school-age kids, now’s the time to put money away for college — or pay off loans if they have already graduated — depending on your education funding goals.
5 years out:
- Continue fine-tuning your tax strategy.
- If you haven’t maximum-funded your retirement plan up to federal limits, consider doing so.
- Pay down unsecured debt, such as credit cards.
1 year out:
- Give some thought to which income sources you want to draw on first, second and third.
- Determine whether you’d like to take or delay Social Security benefits.
- Work with your advisor to manage risk in your portfolio.